INTRODUCTION TO GENERAL INSURANCE EXAM STUDY MANUAL Table of Contents Text 1 – Insurance Operations Assignment 1: Overview of Insurance Operations ....................................................................................... 1 Assignment 2: Insurance Regulation .......................................................................................................... 11 Assignment 3: Insurance Marketing Distribution ....................................................................................... 21 Assignment 4: The Underwriting Function ................................................................................................ 31 Assignment 5: Underwriting Property and Liability Insurance .................................................................. 39 Assignment 6: Risk Control and Premium Auditing .................................................................................. 49 Assignment 7: The Claim Function ............................................................................................................ 57 Assignment 8: Adjusting Property and Liability Claims ............................................................................ 67 Assignment 10: Reinsurance ....................................................................................................................... 83 Text 2 – Survey of Personal Insurance and Financial Planning Assignment 2: Automoble Insurance and Society ...................................................................................... 93 Assignment 3: Personal Auto Policy – Liability, Med Pay, and UM Coverage ....................................... 101 Assignment 4: PAP: Physical Damage, Duties After Accidents, Endorsements ...................................... 111 Assignment 5: Homeowners Property Coverage ...................................................................................... 119 Assignment 6: Homeowners Liability, Conditions, Coverage Forms and Endorsements ....................... 129 Assignment 7: Other Residential Insurance .............................................................................................. 137 Text 3 – Survey of Commercial Insurance Assignment 1: Commercial Property Insurance, Part I ............................................................................. 147 Assignment 2: Commercial Property Insurance, Part II ........................................................................... 157 Assignment 6 Commercial General Liability Insurance, Part I ................................................................ 165 Assignment 7: Commercial General Liability Insurance, Part II .............................................................. 173 Assignment 9: Workers Compensation and Employers Liability Insurance ............................................ 181 Assignment 11: Specialty Coverages ........................................................................................................ 191 © ACTEX 2015 Introduction to General Insurance Insurance Operations Assignment 1: Overview of Insurance Operations 1 ASSIGNMENT 1 OVERVIEW OF INSURANCE OPERATIONS I. CLASSIFICATIONS OF INSURERS A. Introduction 1. Insurance – system where participants (e.g. individuals, families, businesses), make payments in exchange for commitment to reimburse specific types of losses in certain circumstances 2. Insured – participants in system who benefit from reimbursement of covered losses 3. Insurer – organization or entity that facilitates pooling funds and paying benefits a. The principal function of insurers: acceptance of risks that others transfer through insurance b. Core operations: 1) underwriting, 2) claims, and 3) marketing B. Four Ways of Classifications of Property-Casualty Insurers 1. Legal form of ownership 2. Place of incorporation 3. Licensing status 4. Insurance distribution systems and channels C. Classification Summary 1. Legal form of ownership a. Proprietary i. Stock insurers ii. Lloyd’s of London and American Lloyds iii. Insurance exchange b. Cooperative i. Mutual insurers ii. Reciprocal insurance exchanges iii. Fraternal organizations iv. Other cooperatives – captive insurers, risk retention groups, purchasing groups c. 691701Pools i. Pools ii. Government insurers 2. Place of incorporation a. Domestic b. Foreign c. Alien 3. Licensing status a. Admitted b. Nonadmitted 4. Insurance distribution systems and channels a. Independent agency and brokerage marketing system b. Direct write marketing system c. Exclusive agency marketing system D. Legal Form of Ownership 1. Proprietary insurers a. Stock insurers – Owned by their stockholders, most prevalent type of propriety insurer in US © ACTEX 2015 Introduction to General Insurance 2 Assignment 1: Overview of Insurance Operations Insurance Operations b. Lloyds associations – Lloyd’s of London and American Lloyds i. Lloyd’s of London is a marketplace, similar to stock exchange ii. Provides the physical and procedural facilities for members to write insurance iii. In the past, insurance each member wrote was backed by his/her personal fortune; now, more members are corporations and have only limited liabilities iv. Provides coverage for many unusual or difficulties loss exposure and underwrites much of global marine and aviation insurance v. American Lloyds associations are smaller and most are domiciled in Texas because of the favorable regulatory climate vi. Most were formed or have been acquired by insurers. vii. Members (underwriters) are not liable beyond their investment in the association c. Insurance exchange – similar to Lloyds associations. Members can be individuals, partnerships, or corporations, and have limited liability 2. Cooperative Insurers – owned by policyholders and includes mutual insurers, reciprocal insurance exchanges, fraternal organization, and other cooperatives. a. Mutual insurer – an insurer that is owned by its policyholders and is formed as a corporation for the purpose of providing insurance to policyholders. i. Policyholders have voting rights ii. Some profit is retained to increase surplus iii. Excess profit is usually returned to policyholders iv. Includes some large national/regional insurers b. Reciprocal insurance exchange – an insurer owned by policyholders and is formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. i. Members agree to mutually insure each other ii. Members share profits/losses in proportion of their purchased insurance iii. May be formed to receive favorable tax treatment c. Fraternal organizations resemble mutual companies, but they combine a lodge or social function with their insurance function. They write primarily in life and health insurance. d. Other cooperative insurers include captive insurers, risk retention groups, and purchasing groups i. Captive insurer – a subsidiary company formed by a business organization or a group of affiliated organizations to provide all or part of its insurance a) “Formalized self-insurance” b) May also be formed to cover losses that other insurers will not cover at any price c) Some states encourage the formation and operation of captive insurers, while others do not permit the formation of captive insurers ii. Risk retention groups and purchasing groups usually organized so that a limited group or type of insured is eligible to purchase insurance from them a) Can be formed as stock companies, mutual, or reciprocal exchanges b) Becoming more significant in the evolving insurance market place 3. Other insurers include pools and government insurers a. Pools – A pool consists of several insurers, not otherwise related, that join together to insure lose exposures that individual insurers are not willing to insure: losses that occur too frequently or are too severe (e.g. airplane crashes or nuclear meltdowns) i. Pools formed voluntarily or to meet statutory requirements ii. Pools operate either a) As syndicate – Insured has contractual relationship with pool members and can sue any or all of them directly b) Through reinsurance – Insured has a contractual relationship only with the member that issued the policy. Policyholder has no legal rights against the other members of the pool and may not even know that they exist iii. Many pools are required by law a) Virtually all states require some kind of pooling arrangement to provide auto © ACTEX 2015 Introduction to General Insurance Insurance Operations Assignment 1: Overview of Insurance Operations 3 liability insurance for drivers who cannot obtain insurance in the standard market b) Fair Access to Insurance Requirements (FAIR) plans – an insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties (in more than half the states) c) Windstorm coverage in southeastern states b. Federal government offered insurance i. National Flood Insurance Program (NFIP) ii. Terrorism Risk Insurance Act iii. All states offer some forms of government insurance (e.g. workers’ compensation insurance) E. Place of Incorporation 1. A domestic insurer is incorporated within a specific state or, if not incorporated, is formed under the laws of that state – insurance is regulated at the state level a. Reciprocal insurance exchanges are the only unincorporated insurers permitted in most states b. Insurance exchanges and Lloyd’s organizations are permitted under law in only a few states 2. A foreign insurer is a domestic insurer licensed to do business